Fixed Income 2024 YTD: Rate Expectations
At the start of 2024, global investors were bullish on short-term interest rates and longer dated bonds and, mostly, neutral to bullish on equity markets.
Two months in to the year, forecasts are being ripped up as equity markets hit new highs and interest rate cut expectations have receded.
However, without forecasting anything, it still looks to me as if rate expectations remain too bullish in the absence of a material change in economic activity or actual inflation prints. Year-end 2024 Short Term Interest Rate Contracts have sold off, but only by 50 - 75 bps, and this may have much further to run. Likewise, 5-year swaps 1 year forward are still materially below current 5-year swaps. So, "Duration" may ultimately disappoint on returns even if rates are cut a bit.
As a result, investors in funds with a long duration bias are in a dilemma, as YTD performance is quite negative and it is not obvious that this will reverse anytime soon.
In marked contrast, deep credit exposure assets such as "B / BB" High Yield and Tier 1 Bank and Insurance Capital have performed very well YTD and still offer substantial yield for a given duration. It is possible to maintain a BB / BBB credit intensive portfolio, with little to no realistic prospect of defaults, with a Yield To Worst / Duration ratio of 2, which provides solid protection against rate disappointments.
Yes, if economies slow and the much anticipated US recession appears, "Duration" will do well, and shorter-dated lower rated credit will suffer - but I wouldn't bet on it.
Head of Fixed Income Titan Investment Solutions
1 年Looks like I inadvertently called the top in rates in a post about how unlikely it was for rates to go lower ?? DOH !
Head Of Fixed Income at Crown Agents Investment Management
1 年So far little drama. We have seen govies correcting nicely which cannot be said about spreads. So far the strategy has worked well but when the tide turns who is going to bid this “ junk gems”?